Management of Unit Linked Contracts (4, 16, 17)

Question 1

Structural bases

Answer 1

with-profits

without-profits

unit-linked

index-linked

Question 2

Unit linked Needs

Answer 2

higher E(benefit)

lower E(premium)

– flexibility

Question 3

Unit linked risks to insurER

Answer 3

Lower than non-unit

Financial risks
- nature & level of guarantees
- constraints on charges (legal & marketing)

Investment risk
- PH
- second order

Expense risk
- reviewable charges
- competition

Legislative restrictions
- charges
- risks

Withdrawal risk
- negative unit-fund

Anti-selection
- comparable non unit

market risk
- significant

Question 4

Unit linked capital requirements

Answer 4

Depends

Low allocation = less capital

Actuarial funding

Question 5

Index linked contracts needs

Answer 5

Protection that index tracks
– economic
– investment

Question 6

Index linked risks

Answer 6

– matching risk
> X actively traded
> too many constituents
> changing constituents

– index risk

Question 7

Risk to insured

Answer 7

Without
- benefit amount
- inflexibility
- insolvency

With
- some inflation
- insolvency risk

Unit
- some inflation
- poor performance

Index
- investment
- less flexible
- insolvency
- less scope to review charges
- insolvency

Question 8

Basic equity principle (unit pricing)

Answer 8

The interests of unit-holders not involved in a unit transaction should be unaffected by that transaction.

Question 9

Appropriation price

Answer 9

units created

Question 10

Expropriation price

Answer 10

Units cancelled

Question 11

The calculation process for:

Appropriation price (5)

Answer 11

This can be calculated as follows:

1. the market “offer price” value of the assets held by the fund PLUS the expenses that would be incurred in the purchase and any stamp or other duty payable in respect of such a purchase.
2. PLUS the value of any current assets, such as cash on deposit or investments sold but not yet settled.
3. LESS the current liabilities, such as investments purchased but not yet settled or loans to the fund.
4. PLUS any accrued income, such as interest income from fixed-interest securities and deposits, net of any outgo, such as fund charges.
5. less any allowance for accrued tax, if applicable.

Question 12

Offer Basis

Answer 12

amount of money into the fund = net # units created X appropriation price

Question 13

Bid basis

Answer 13

amount of money into the fund = net # units cancelled X expropriation price

Question 14

Bid price

Answer 14

units bought from PH

Question 15

Offer price

Answer 15

Units offered for sale to PH

Question 16

Actuarial Funding

Answer 16

Actuarial funding is a technique whereby life insurance companies can hold lower reserves for unit-linked contracts to which it can be applied, and thus can reduce new business strain.

Issue:
– CF timing
– Investment linked

Question 17

Actuarial funding considerations about policy surrender (2)

Answer 17

1. The surrender value must not be higher than the funded value of units held.
2. A profit will be made on surrender if the surrender value is lower than the funded value.

Question 18

Actuarial Funding Conditions

Answer 18

1. Contingent event
2. Regular fund management charges
3. Surrender penalty

Question 19

Profit influences (10)

(Aspects influencing company’s profits and risk profile)

Answer 19

DUI HRRRR CAPM

1. Investment policy
2. u/w policy
3. Discontinuation terms
4. HR & Remunerations
5. RE strategy
6. Reserving
7. Capital management
8. Admin (procedures / data / maintenance)
9. Profit distribution
10. Monitoring